Rental yield

A measure of the income a real estate property can deliver, calculated by dividing the annual gross rental by its nominal price, and expressing the result as a percentage. However some rental yield measures are based on gross rental income (including interest, body corporate and other associated costs).

Properties with high rental yields would suit investors seeking rental income, such as people on low incomes who cannot afford to invest in an expensive property, or retirees seeking immediate returns rather than a long term investment strategy. Apartments tend to have high rents proportionate to their actual value, and so are high yielding properties.

Conversely, houses are relatively more expensive compared with the rents they attract, and thus such low yielding investments would be chosen only if the investor intends to profit through capital growth. Wealthier investors who can enter expensive property markets where the price of land constantly rises might choose to properties with low rental yields. Any additional expenditure needed to pay off and maintain a property beyond what comes from the tenant's rent could be used to offset any taxation liabilities.

Rental yield is influenced by both demand and supply side factors in the rental and property ownership markets. High rental yield properties can be found when property prices are undervalued, vacancy rates low and rents are rising. In 2004Australia had an average rental yield of 3.8%, compared with 7.5% in Britain, 8.0% in the United States and 9.5% in Canada. Rental yields tend to be higher in continental Europe and countries with a historically low level of home ownership.

As a general rule, a yield of greater than or equal to the interest rate plus 2.5 per cent will self-fund an investment property over 25 years (including tax and depreciation, but excluding the initial 20 per cent deposit).